[ by Melanie Gretchen ]

FINRA's Chief Legal Officer Robert Colby sat down with Chip Jones, SVP for Member Relations, to discuss where FINRA's rules are headed.  Compliance Insights prepared the following a transcript:

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Chip Jones. At FINRA's annual conference a couple weeks ago, there was discussion about a new discipline for FINRA rules going forward and a retrospective review of the current FINRA rulebook.  Can you tell me a little bit about that process and how you anticipate that's going to work?

Robert Colby. Given the importance of FINRA rules for the firms, we felt, like the other regulatory agencies, we need to do a more quantitative analysis if possible about the economic impact of the rules on the firms.  We tried to this already by soliciting comments by the members and specifically saying topics that we'd like to get data on about the impact and the competitive results that the rules might have, but we also wanted to bring in some experts that could bring an economic discipline to this, so we just brought in Jonathan Sokobin as our new chief economist, and he's going to be bringing in economic staff to support him, and the idea is we'll be able to look at these rules and try to be more rigorous about understanding what the impacts they may have on the firms, on the structure of the market, and that we can better explain these impacts when we submit the rules to the SEC for approval.

Chip Jones. Can you tell me a little bit about the look-back at the current rules, and it may be what Jonathan's role going to be in that particular project and how you and your staff are going to determine which determines you're going to take a look at and what order.

Robert Colby.   Often you don't have good numbers when you're coming to adopt a rule, and so you have to make a decision on more qualitative factors, and particularly in that situation, it's important to look back and see if you got it right, so we're going to take the major rules and put them out several years after they've become effective and ask for public comment about what the impact has been, whether it's what we hope it would be, whether the rule's operating the way we had anticipated, and use that comment to decide whether to revise the rule.  So that's new rules.

For existing rules, you know, we have lots and lots of rules, they're not all equally important, and they may not all have the same impact on members, and so we're trying to find out a way to prioritize which rules to look at first.  And so, what we've decided to do is talk to different groups and get different input as to which rules we should deal with first, and part of that is going to be talking to the staff to see if a rule that has an impact on the brokers is actually having an off-setting benefit for the customer or for the administration of the oversight system.

Part of that is going to be talking with the firms, so one vehicle is going to work with our committees and to ask them which rules in their areas they think are most important for reconsideration or revision.  After we've gotten a sense of this, we may well go out to the general membership and ask their view about the priority of these rules and whether we've got it right, and then we will establish a process by which we'll take a rule, we'll put out for comment what the rule was meant to do, what it requires, and asks whether there's changes in the rule that would be necessary.

This will be a cooperative process between the chief economist and the general counsel's office and the subject matter areas, with we hope a lot of input from the members.

Chip Jones. Sounds good, and I know the firms will be excited about providing that input. Next, let's talk about a question that we've been talking about - you've brought it up in speeches, I know Rick's brought it up in speeches - and it deals with the conflicts review that we've been conducting.  Tell me a little bit about what's been going on in that project, and what we think the final output will be.

Robert Colby. Well, there's one thing we all know is that broker dealers have conflicts, and so they have to be managed, in order to protect the firm, protect the customer, so we went out to 14 firms, to try to understand how they went about the process of identifying and managing these conflicts.  Very interesting discussions.  There were meetings in person.  We got materials from them.  We sent a questionnaire out.  We sent another questionnaire asking about compensation in particular to understand the sales practice, how compensation fit into that.  We're coming to an end of that information collection process.

We are working out on best practices, hope to be able to put it out this summer, to identify where we saw practices that we thought were particularly helpful, sometimes when there were practices that seemed less complete.  One lesson I thought we took from this was that it's important that firms have a process by which they identify conflicts and think about how they want to address them.  Most firms do in particular areas, and many firms do across the firm; at some firms, it wasn't complete, and so the whole idea is you should be thinking about this in a broad manner is important for us.

Chip Jones.  The last question I had for you today deals with a project that we've  been working on with a group internally focused on limited purpose broker-dealers.  Can you tell me a little bit about the project, what we hope the final output of that particular project will be?

Robert Colby.  We've been looking at whether it's possible to determine some categories of broker-dealers, because they don't touch funds and securities or they have limited roles that don't need all our roles to apply to them.  Many of our rules don't apply evenly - they're tiered so they apply to the less way to smaller broker-dealers and there are some rules that don't apply at all, but they're not made explicit - so we're thinking, if there's some way to pull these together, so that there's a rule book for these particular type of broker-dealers that would simplify what their understanding of what the rules are, and then there may be rules that simply shouldn't apply, so we're trying to figure what broker-dealers would be suitable for this, and then go through the rules and figure out which rules should be separated out or shouldn't apply.

Chip Jones. Is there a time frame that you're looking at as sort of a goal to put something out for firms to comment on?

Robert Colby. The initial category of broker that we're looking at is brokers that help sell hedge funds interests to institutional clients.  We've gone through the rules for this set to identify this set of rules.  We need to do a bit more work on that, but if all goes well, we might be able to publish for a request for common on that this fall.

[FINRA, 6/11/13]